Electricity Capacity (No. 2) Regulations 2019

Debate between Lord Henley and Lord Stunell

Wednesday 17th July 2019 Lords Chamber

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

My Lords, the capacity market is a key element of the Government’s strategy for maintaining the security of electricity supplies in Great Britain. This instrument will help maintain a strong security-of-supply position into the future. The capacity market secures the capacity required in Great Britain during periods of peak demand through competitive, technology-neutral auctions normally held four years and one year ahead of delivery. These are known as T-4 and T-1 auctions. Those who win capacity agreements—known as capacity providers—commit to providing capacity during periods of system stress in exchange for receiving capacity payments.

I will briefly provide some context before expanding on the provisions of this draft instrument. On 15 November 2018, the General Court of the Court of Justice of the European Union annulled the European Commission’s state aid approval for GB’s capacity market, introducing a “standstill period” until the scheme can be reapproved. The judgment means that the UK Government are not able to award capacity agreements or make capacity payments unless and until state aid approval is obtained. The Commission is currently conducting a state aid investigation for the capacity market, and we are working with it to ensure it can reapprove the scheme as quickly as possible.

We have taken steps, through an earlier instrument—the Electricity Capacity (No. 1) Regulations 2019—and associated changes to the capacity market rules, to maintain the operation of the capacity market, to the extent possible, while state aid approval is obtained. The steps we have taken to put in place these interim arrangements are currently subject to judicial review proceedings, which we are robustly defending. The House of Lords Secondary Legislation Scrutiny Committee has highlighted the continuing uncertainty for the capacity market resulting from these judicial review proceedings and from the Commission’s state aid investigation.

This second instrument put before the House today focuses on future auctions, which will not proceed unless and until the capacity market has state aid approval. This means the instrument is unlikely to be impacted by the judicial review. First, the instrument makes changes to enable the T-4 auction for the 2022-23 delivery year, which was postponed following the state aid judgment, to be replaced by a one-off T-3 auction. It will only be held if state aid approval has been received and would be held in early 2020. Secondly, this instrument makes changes to remove or reduce what might otherwise be unnecessary burdens on business in relation to credit cover.

Applicants seeking to enter certain types of capacity market unit—for example, those that are unproven or not yet constructed—into a capacity auction are required to provide and maintain credit cover. The instrument adjusts the credit cover requirements for a CMU entered into both the upcoming T-3 and T-4 auctions, to enable the credit cover obligations for both auctions to be satisfied jointly rather than separately.

It also extends the existing suspension of credit cover obligations, provided for by the Electricity Capacity (No. 1) Regulations 2019, to the three upcoming capacity auctions likely to take place in 2020. It makes changes to ensure that when the suspension of credit cover is lifted, following state aid reapproval, existing exceptions to credit cover requirements still operate as intended. Finally, the instrument makes changes to support the participation of certain unsubsidised renewable technologies in future auctions.

The capacity market was always intended to include all unsubsidised technologies. Some types of renewable technology, such as biomass, have always been able to participate provided they are not receiving other specified low-carbon subsidies. However, when the capacity market was conceived, wind and solar required subsidy, so were not included in its technical rules. With unsubsidised renewables now a prospect, the capacity market rules have recently been amended to allow wind and solar to participate.

This instrument supports this change by requiring state support for new-build renewable CMUs, which has been declared under the rules to be deducted or repaid from capacity payments. This enables renewable technologies in receipt of subsidies—other than those which exclude them from the scheme entirely—to participate without cumulation of state aid received through the capacity market and other schemes. Alongside these regulations, we have also laid complementary amendments to the capacity market rules, which govern the technical and administrative procedures relating to capacity market operation.

These regulations are necessary to ensure the smooth running of the capacity market in the period after state aid approval is received, and to broaden the participation of renewable technologies. I commend the draft regulations to the House.

[Lord Stunell (LD)]

My Lords, I will ask the Minister some questions, and I express some surprise that, in his presentation to the House, he did not mention demand-side response, which was the subject of an intervention I made on a previous occasion, and the reason why the state aid ruling was made by the European court. As it is absolutely at the centre of the reason why this matter has not been settled and the UK Government’s proposals were rejected, the Minister owes the House a little more detail about that, particularly because, as I understand it—he made the point himself—all the paperwork in front of us today is conditional on implementation on receiving state aid approval from the EU. At the moment, that is still outstanding.

That arose from an action taken at the European Court back in 2015 by a small company called Tempus Energy, which claimed that the system was discriminatory against those who sought to reduce electricity consumption as opposed to increase electricity generation. The outcome of that was that its claim led to the UK’s scheme being sent back for a rethink.

The way it is supposed to work is that firms bid into the auction at the price they need, either to keep existing plants open to generate electricity or to create new capacity from scratch. It does not deal adequately with the situation of companies which have come forward with a commercial proposition that they will reduce overall electricity consumption. That is surprising because, in fact, overall electricity consumption is falling, not rising. The Government itself recently took account of that, having for a long time somewhat denied the relevance of it to the whole question.

Having said all that, it is surprising that the Minister has not referred to the ECJ judgment, in particular to paragraphs 203 to 207 of it, and paragraphs 27(e) and 69 of the official guidance put in support of that judgment. Has the Minister read those paragraphs, and if he has, does he think that the plain and ordinary meaning of them could in any way be construed as a simple technical reprise as opposed to an outright rejection? How certain is he that the judgment of the European Court was not, as the Minister in the House of Commons alleged it to be,

“a challenge to the nature of the UK capacity market mechanism itself”?—[Official Report, Commons, 19/11/18; col. 1090WS.]

It seems that it is not very easy to make that stand up, and as regards our taking a decision today, it needs at least a little amplification and clarification.

The allegation put to the European Court was that our UK system was discriminating against those who had a commercial appetite to reduce electricity consumption as opposed to having proposals to provide generation. I hope the Minister will say that is not true and contradict the advice I have been given that, the way the system is designed at the moment, those who want to reduce consumption—the capacity supply industry—have to make sure they have a payback period in 12 months, whereas those on the demand side are given 15 years. That inequality is leading to discrimination, which means that DSR is extremely difficult to bring within the scope of the support that these regulations are intended to provide.

I hope the Minister will be able to give us some reassurances about the amount he has read and the legal interpretation of it he has, as well as something about demand-side response and getting that playing field level for all those who want to contribute to carbon reduction in the UK via the electricity market.

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[Lord Henley]

I might have to write in greater detail, but both T-1 and T-4—the short term and longer term—deal with the point about discrimination. I might be wrong, but I will think about that and come back to the noble Lord.

[Lord Stunell]

I am sure that the Minister is aware that for the cost of a gigawatt of generation capacity, you could have a great deal more demand reduction capacity, but only if the right trading environment is in place. If I can offer support to my noble colleague on the Front Bench, it does mean that by the time you have built the generating capacity, the case for the demand-side reduction shrinks. The noble Lord’s argument that six months was therefore justified in the one case, and 15 years was necessary in the other, is precisely the point that the European Court of Justice felt was evidence that the European Commission had not looked thoroughly enough at the UK Government’s scheme. I would have expected him to be saying that this aspect had been reviewed in bringing forward alternative regulations to the House.

[Lord Henley]

Again, it might be better if I write to the noble Lord on that point. He is aware that the Commission—which we support on this—is not happy with that judgment. It needs to be looked at and, as I made clear earlier, we are working with the Commission to ensure that it has everything it needs to continue considering that wider state aid approval for the regime as quickly as possible. I will write to both noble Lords on that point. I made it clear to the noble Lord, Lord Teverson, that I will also write with a more detailed letter on the cost of capacity auctions and the amount of capacity that has been used in the past.

The noble Lord, Lord Teverson, also asked about storage. Both he and I have stressed on other occasions that we see storage playing a great role in the world of energy in the future. I can give an assurance that storage is able to compete in the capacity auctions and has been able to since the outset. I have dealt with the question from the noble Lord, Lord Grantchester, about when we will publish the five-year review; as I said, we hope to do so shortly. That will not be the end of the process, which will identify areas of the capacity market’s design where further amendments may be necessary.

The noble Lord, Lord Grantchester, also asked about support under some schemes preventing renewables participating in the capacity market altogether, where other schemes simply deduct from the capacity market payments. It remains appropriate to exclude CMUs which benefit from contracts for difference, the renewables obligation and feed-in tariff payments, as those are the most likely and significant alternative support for CMUs participating in the capacity market. That prevents the accumulation of state aid. Less significant forms of support do not exclude renewable CMUs from the capacity market. Instead, the rules require new-build wind and solar generation to declare this support, so that it can be deducted from capacity payments. What a capacity provider is authorised to receive under state aid, in addition to its capacity payments, does not need to be declared or deducted.

I turn to a matter rather beyond this debate: our general policy on onshore wind. I can tell both noble Lords who raised the subject that I know of no plans to change that policy. We have seen great improvements in offshore wind, which has the great benefit over onshore wind of being in windier, flatter places where it is possible to build even bigger windmills than are possible on land, as I think even the noble Lord would agree. I therefore cannot offer him any hope that our policy is about to change on that.

Lastly, the noble Lord asked about the energy Green Paper, which we still hope to publish before we break for the summer. He will have to be patient for only another four or five days.

I have dealt with most of the points raised and offered to write on others. I beg to move.

Electricity Capacity (No. 1) Regulations 2019

Debate between Lord Henley and Lord Stunell

Wednesday 3rd April 2019 Lords Chamber

[Lord Henley]

I am grateful to the noble Lord, Lord Grantchester, for his support for this instrument, and I look forward to that support in a few minutes when I conclude my words. At the same time, he called for a halt. Since we are talking about security of supply, I simply cannot go along with him. It is the Government’s view, widely supported by the industry, that the capacity market is the best way to deliver security of electricity supply at the lowest cost to consumers. We will debate this matter tomorrow at Question Time. It is important that we have security of supply and that we have it at the best price. As I said in my opening remarks, our current security of supply positon is robust. I cited the figure that we reckon the margin this winter will be— over 11%, the highest for five years. That shows that the market works.

A number of concerns have been raised and a number of questions put, and I hope I can deal with them. I will first get on to the question of uncertainty and engagement that the noble Lord, Lord Tope, raised, echoed by the noble Lord, Lord Grantchester. It is important to recognise that there is uncertainty. We appreciate that any judgment of the Court of Justice of the European Union creates uncertainty and potential difficulties for the industry.

As I made clear, the Commission is investigating the scheme, and recently confirmed that it is moving on to the next phase. This is an important step as we work to reinstate state aid approval for the capacity market as soon as possible. We are working with the Commission to ensure that we have everything necessary to reconsider the scheme as quickly as possible. I assure the noble Lord, Lord Tope, that we will continue to engage regularly with stakeholders; we will provide them with updates on progress and the re-notification process, and clarity on arrangements during and following the standstill period.

We are confident that the Commission will approve the scheme following its investigation. We hope that that investigation will conclude ahead of October 2019, the start of the 2019-20 delivery year. We consider it very improbable—although it is possible—that the decision will be delayed into 2020. In the unlikely event of a negative state aid decision, or no decision, by October 2020, the instrument will terminate capacity agreements and, as I said in my opening remarks, any entitlement to receive capacity payments. Supplier payments then held by the settlement body will also be returned, which will ensure that supplier payments cannot be held indefinitely.

The noble Lord, Lord Tope, asked about the position after a no-deal Brexit. The Government have made it clear that no deal is exceedingly unlikely. However, while the UK remains a member state or is subject to an implementation period following a negotiated withdrawal, the current state aid regime will apply and the Commission will need to approve the scheme. The Government intend there to be a domestic state aid regime after the UK leaves the EU. The draft State Aid (EU Exit) Regulations 2019 are currently before Parliament. In a no-deal exit, the UK will be subject to a domestic state aid regime, for which the Competition and Markets Authority, rather than the Commission, will be the regulator. This assumes that the draft State Aid (EU Exit) Regulations are agreed by both Houses and made. If, at the time the UK leaves the EU, the Commission has not yet approved the scheme, it will then be a matter for the CMA to investigate and approve that scheme.

The noble Lord, Lord Tope, asked whether the decision of the court itself was purely procedural. This question was echoed by the noble Lords, Lord Stunell and Lord Grantchester. The court gave examples of where the Commission should have had doubts and should have investigated them, but it did not rule that the design was incompatible with state aid requirements. We have carefully considered each issue raised through that court judgment and remain confident that the design of the capacity market is compatible with the state aid requirements. We cannot pre-empt the outcome of the Commission’s investigations, but we are confident that the scheme will be approved by the Commission following investigation, not least because it has approved six other capacity markets since 2014.

The noble Lord, Lord Stunell, asked whether the capacity market did not sufficiently support demand-side response. As I made clear, the purpose of the capacity market is to ensure security of supply, at least cost, for the consumer—something we all desire to achieve. It is technologically neutral and allows all types of capacity, including DSR, to participate without discrimination.

The design of the capacity market provides for features that support demand-side participation, including lower credit cover, participation as price takers and three metering options. The Government are also taking broader action to support DSR, as set out in the smart systems plan. The five-year review of the capacity market, which the noble Lord, Lord Grantchester, asked about, will also explore further ways in which DSR participation can be supported.

The noble Lord, Lord Grantchester, also asked about the judicial review and the case raised by Tempus. We are confident about our position. The Government will robustly defend this challenge and, as I said, we are confident in the steps we are taking to reinstate the capacity market and to operate the scheme to the fullest extent possible during the standstill period within state aid constraints.

Turning to renewable generation and carbon reduction, the noble Lord, Lord Grantchester, implied that we were not serious about switching to low-carbon electricity generation. As he will be aware, we are committed to switching away from coal. We have announced that we will be giving up coal in 2025 and increasing the share of renewables and gas in electricity generation while reducing the cost of renewables. We have seen a dramatic reduction in the cost—I recently cited the figures for offshore wind—and we have invested £92 billion in clean energy since 2010. We have quadrupled our renewable electricity supplies since 2010 and the share of electricity generated from low-carbon sources reached a record high of 56% in the third quarter of 2018, with 33% from renewables. I hope the noble Lord will accept our commitment in that area.

[Lord Stunell]

I thank the Minister for what he has said so far and for his shopping list of money well spent. I do not wish to challenge that but is he satisfied that the Government’s investment is rightly balanced between generating new capacity—renewable or otherwise —and demand reduction? He said that the system takes account of DSR but he did not answer my point about whether there are equal investment opportunities to reduce a kilowatt hour as there are to increase capacity by a kilowatt hour.

[Lord Henley]

My Lords, I am satisfied but I will consider carefully what the noble Lord has said and look again at the Written Answer to which he referred, which I sent to him last week. If I can elaborate on it and provide him with further examples of how we have taken DSR sufficiently into account, I shall write to him on that if I feel it necessary. However, I do not accept his basic premise that there is not a level playing field.

I believe I have answered all the questions put to me. This is an important statutory instrument and I commend it to the House.

Buildings: Energy Performance

Debate between Lord Henley and Lord Stunell

Tuesday 11th December 2018 Lords Chamber

[Lord Stunell]

To ask Her Majesty’s Government what steps, if any, they plan to take to improve the energy performance of buildings as a contribution towards reducing carbon emissions and achieving the United Kingdom’s climate change obligations.

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

My Lords, the Government are committed to improving the energy performance of buildings—with some speed, I hope. In the clean growth strategy, we set out our aspiration for domestic properties to achieve energy performance certificate band C by 2035, to reduce business energy use by 20% by 2030, and for the public sector to achieve a 30% reduction in carbon emissions by 2020-21.

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[Lord Stunell (LD)]

I thank the Minister for his Answer. He will know, of course, that the UK’s performance is falling well below the targets set in the clean development strategy and, indeed, in the figures he just gave. Buildings account for 30% of the UK’s energy emissions. Is it not time to start a major programme of retrofitting existing buildings, particularly homes, thereby saving people’s energy costs and meeting our carbon targets?

[Lord Henley]

My Lords, I accept the importance of buildings in achieving our carbon reduction targets. But I remind the noble Lord, as I have previously, that since 1990 we have reduced our emissions by some 43%; that is the fastest decarbonisation of any G20 country, which is something we can be proud of. As the noble Lord correctly states, it is important that we do this particularly for buildings. The clean growth strategy set out our aspirations for as many homes as possible to be upgraded to an energy performance certificate of band C by 2035, and we will continue to pursue that.

Better Regulation

Debate between Lord Henley and Lord Stunell

Thursday 7th December 2017 Lords Chamber

[Lord Henley]

I think the noble Lord is referring to another letter. The postal service has been quite busy. I will come to the comments of the Public Accounts Committee in due course. I am referring to what amounts to a leaked document.

[Lord Stunell]

The Minister talks about coming back to this in due course, but I understand that the new regime is in place now. Is there a hiatus between the new regime and him coming back to consider matters?

[Lord Henley]

The noble Lord is correct that the new regime is in place, but that does not mean that all proposals are finalised; these matters can always be considered in the light of representations made, even by the noble Lord. He and I were in the coalition Government together; we worked together in the past. I am sure we can take account of comments made here, and I would be more than happy to listen to him.

I want to make it clear—not commenting on leaked documents—that our proposals actually increase scrutiny by bringing significant deregulation measures into scope. They focus the system on measures with large impacts. This brings me to the Public Accounts Committee, whose recommendations it is worth commenting on. The 2016 report said:

“The Better Regulation Executive’s rules for assessing and validating the expected impact of a regulation are the same, regardless of the scale of the regulation’s impact. The Better Regulation Executive … has established a complex bureaucracy across Whitehall that diverts departments’ resources away from potentially more productive efforts … Of the 95 regulations that the Regulatory Policy Committee has scrutinised during this Parliament, 64 of them have an individual expected net impact of less than £5 million”.


The committee then recommended that we should change the rules to allow a more proportionate approach whereby significantly more effort can be applied to the assessment and validation of the small number of regulations with the greatest impact. That is what we are doing with the de minimis rule.

That is why we took this action and why I wrote to the Public Accounts Committee only last month to inform it that we intended to follow its recommendations and adopt a more proportionate and efficient better regulation system by introducing that threshold. Obviously, we can always reconsider those matters, but that is why I wrote. It will allow the RPC to focus on the measures that matter most. If it had been in force in the last Parliament, 90% of the costs would still be subject to independent scrutiny.

It is only right that regulation should be kept under constant review as products and technology change. Where regulatory requirements are not clear or easily understood, it can lead to confusion and potentially an increased risk to the public. Over the last 20 years, Governments have been working on getting the delicate balance or proportionality right and the costs and benefits of regulation right. That has included the establishment of the Regulatory Policy Committee, as I mentioned earlier, which gives independent scrutiny of the evidence for regulatory changes when they are debated in Parliament.

There were previous government initiatives to review the stock of legislation. Going back to the beginning of the coalition Government, which the noble Lords, Lord Stoneham and Lord Stunnell, will remember, there were the Red Tape Challenge and the cutting red tape reviews. The noble Lord, Lord Stunnell, took credit for introducing the one-in, one-out measure, which I think he accepted served a useful purpose in encouraging the process, even if another noble Lord—I think it was the noble Lord, Lord Whitty—did not like the idea and said that it led to getting rid of something purely for the sake of it. But it encouraged the others and served a useful purpose.

Those reviews sought views from the public to help identify outdated, unnecessary or overly complex legislation and led in due course, as both noble Lords and others will remember, to the Small Business, Enterprise and Employment Act 2015. My noble friend will remember that because she took the legislation through the House. It introduced a requirement for the Government to set a business impact target, focused on the economic impact of regulatory change on business activities, and the need to report annually on its achievements against that target.

These initiatives have delivered some real improvements in how people, businesses and public bodies are regulated, and have also encouraged a cultural shift in government departments towards more appropriate and smarter regulation. The one-in, one-out or one-in, two-out proposals played a part in that. For example, my own department’s business perceptions survey last year showed a decline in the proportion of businesses that believed that the overall level of regulation in the UK was an obstacle to their success. It went down to 49% in 2016, from 62% in 2009.

As I said earlier, the Public Accounts Committee produced a number of recommendations about how we can further improve our regulation system, following the report from the National Audit Office last year. We have been reflecting on those conclusions, including ideas about how to make our approach more proportionate.